On Monday, the US dollar saw a significant sell-off, falling more than 1% following the announcement of a ‘universal tariff’ plan by the new US administration. Investors are wondering if this could be the start of a trend similar to 2017, when the dollar continued to fall during President Trump’s first year in office.
However, Bank of America (BofA) analysts believe that there is not enough evidence to explain the start of a downtrend for the US dollar.
The market’s immediate reaction took the DXY index, which measures the dollar against a basket of other major currencies, to 108. This level is considered a short-term equilibrium for the dollar, especially after the aggressive stance of the Federal Open Market Committee. (FOMC) in December 2024.
The FOMC’s decision was characterized as “an unabashedly aggressive budget cut” in a December 18, 2024 BofA report.
Looking ahead, the US dollar could see a resurgence in strength ahead of the release of the December payrolls report next Friday. The BofA report entitled ‘Labor Market Watch’, dated January 6, 2025, suggests that a strong labor market could lead to a reassessment of expectations for any rate cuts by the Federal Reserve in 2025.
Investors and market participants are now ready to focus on the upcoming labor data for further direction. The expectation is that a robust employment report could counter the immediate bearish sentiment and support the dollar’s value in the near term.
In summary, while the recent sell-off has raised questions about the dollar’s trajectory, BofA continues to maintain that the one-day move is not indicative of a longer-term trend.
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